Ch.10 Analytical Procedures

Question 1

What is the purpose of Analytical Procedures?

Answer 1

It is used to identify areas in the client’s financial information that is of significant risk.

It is used to help assist the practitioner in developing a better understanding of the client

And to identify accounts that are at risk of material misstatements by highlighting unusual fluctuations or changes in accounts.

Question 2

What are some items that must be considered/addressed before using Analytical Procedures?

Answer 2

Reliability of information - if the finanical information is prone to errors, then there is no point in using an analytical as the information may be skewed/incorrect

Annualizing - when comparing income statement accounts, the accounts must be annualized in order to be compared to the PY.

Question 3

What are the different types of Analytical Procedures we can perform?

Answer 3

Horizontal Analysis - comparison of historical information over various reporting periods (changes over year)

Vertical Analysis - comparison of finanical information by representing each line item on the statement as a percentage of another line item (over net sales for example) - helps you compare the financial status of one company to another

Ratio analysis - using ratios to compare year over year or with other similar nature companies.